The head of the International Monetary Fund (IMF) has
warned that deflation remains a real risk to economic
recovery in the eurozone.
Despite signs of recovery across the world, Christine
Lagarde said that potential risks must not be ignored.
One of these was the fact that eurozone inflation, at
0.8%, remained "way below" the 2% target set by the
European Central Bank (ECB).
She was speaking on the final day of the World
Economic Forum, in Davos.
Deflation can hinder growth, as prices and the value
assets continue to fall.
Ms Lagarde told a Davos debate on the global economic
outlook, that - despite signs of recovery everywhere,
there were "old risks" and "new risks".
Old risks included any failure to continue banking
reforms and re-balance economies, she said.
New risks were, how emerging economies responded to
the winding down of economic stimulus measures in the
US, and the problems facing economies whose inflation
rate remained stubbornly below target.
Mario Draghi, president of the ECB, told the same
conference that the bank was ready to act if necessary,
but he insisted that deflation was not yet an issue for
the eurozone.
He said eurozone inflation is "subdued, and expected to
remain subdued" for about two years. "The longer it
stays at a low level, the more serious risk of deflation,"
he said.
'Completely changed'
But he said the fall in inflation was primarily due to
slowdowns in four heavily-indebted countries: Greece,
Spain, Ireland and Portugal.
These countries were now seeing much better economic
growth, which is why eurozone inflation would likely
return to target in the medium term, Mr Draghi said.
In Japan, prolonged deflation stunted economic growth
for years. But government stimulus measures - so-
called Abenomics - appear to be breathing new life into
the world's third-largest largest economy.
The Bank of Japan's chief, Haruhiko Kuroda, told the
conference that the country's inflation rate should reach
its 2% target within two years.
"Now the situation has completely changed, and I'm
quite optimistic as far as economic growth and
appropriate 2% inflation are concerned," Mr Kuroda said.
"They will be achieved, but we are only half way.
There's still a long way to go. We have to be mindful
that there could be downside risks or upside risks from
inside the country or abroad."
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